Which of the following statement is true?

(A) Net profit cannot be calculated unless all provisions have been debited to profit and loss account.

(B) Provision is made for a known liability.

(C) Reserve is shown on the assets side of balance sheet.

(D) A reserve has no effect on taxable profit.

(E) Provision can be used for distribution as dividends.

Choose the correct answer from the options given below.

(A), (B) & (D)

The correct answer is option 4- (A), (B) & (D).

(A) Net profit cannot be calculated unless all provisions have been debited to profit and loss account. TRUE. The amount of provision for expense and loss is a charge against the revenue of the current period. Creation of provision ensures proper matching of revenue and expenses and hence the calculation of true profits. Provisions are created by debiting the profit and loss account and after that net profit is calculated.

(B) Provision is made for a known liability. TRUE. A provision is a charge against profit. It is created for a known current liability the amount of which is uncertain. 

(C) Reserve is shown on the assets side of balance sheet. FALSE as reserve is shown on the liabilities side after capital of the balance sheet. Retention of profits in the form of reserves reduces the amount of profits available for distribution among the owners of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital.

(D) A reserve has no effect on taxable profit. TRUE. A reserve is created after the calculation of net profit so there is no effect on taxable profit.

(E) Provision can be used for distribution as dividends. FALSE as provision cannot be distributed as dividends.